The Climate Crisis and Carbon Trading

Key Points

  • The global climate is changing more rapidly and earth’s systems are proving more sensitive to warming than scientists thought a few years ago.
  • To keep earth hospitable to civilization requires 70% cuts in the world’s consumption of coal and oil and a rapid worldwide transition to clean energy.
  • By insisting on an ineffectual and inequitable system of international emissions trading, the U.S. is obstructing other nations, courting ecological disaster, and preventing a worldwide economic boom from a transition to clean energy.

As the Earth’s temperature rises faster than at any time in the last 10,000 years, the inaction by the Clinton Administration and the resistance by the U.S. Congress to deal with global climate change is isolating the U.S. diplomatically and courting severe warming-driven political, economic, and ecological disruptions.

With our burning of coal and oil, we humans are heating the deep oceans, fracturing Antarctic ice shelves, and fueling more intense El Niños. Glaciers all over the planet are retreating at accelerating rates. Islands are going under from rising sea levels. Plants, fish, birds, and insects are migrating northward. Among the consequences are malaria on Long Island, encephalitis in New York City, and a dramatic increase of tick-borne Lyme disease in New England. Because of the buildup of atmospheric carbon dioxide, we have changed the timing of the seasons; spring now arrives more than a week earlier in the northern hemisphere than it did 20 years ago.

In a remarkable joint statement in December 1999, the chief meteorologist
of the U.K. and the head of the U.S. National Oceanic and Atmospheric
Administration (NOAA) declared that the climate situation is now “critical,”
and they urged the world to begin immediately to reduce its consumption
of carbon fuels. In early March 2000, researchers found that although
the planet’s temperature had been rising at the rate of one degree
Fahrenheit per century between 1900 and 1970, it has been rising at the
rate of four degrees per century since 1980. This rate of increase is
clearly catastrophic.

Nevertheless, after years of talks among the 160 nations that agreed
in principle in December 1997 to reduce carbon emissions, the U.S. seems
farther than ever from ratifying the Kyoto Protocol. The agreement calls
for the U.S. to cut its emissions by 7% below 1990 levels by 2012. Some
40 other industrial nations would be obligated to cut their emissions
by an average 5.5% below 1990 levels. Under the Kyoto Protocol, developing
countries would not be obligated to cut their emissions until the next
round of the treaty takes effect.

Even if ratified and implemented, the Kyoto Protocol would still fall
short—by an order of magnitude—of what nature requires to allow
the climate to restabilize. The science is unambiguous that stabilization
requires worldwide cuts of 60% to 70%, according to the Inter-governmental
Panel on Climate Change, a group of more than 2,000 scientists from 100
countries reporting to the United Nations. The diplomatic fatigue that
is overwhelming delegates to the climate talks arises from the relentless
obstruction by big oil and big coal and from the exclusive focus on the
deeply flawed mechanism of emissions trading to achieve emissions reductions.

Despite its inadequate goals, the Kyoto Protocol does provide a necessary
diplomatic framework for nations to address the climate crisis. (See FPIF
brief vol. 5, no. 8, April 2000.) What is preventing agreement on even
these minuscule goals is the negotiators’ reliance on emissions trading
to achieve these cuts. This “cap-and-trade” scheme, promoted
by market-mesmerized economists, determines each country’s emissions
quota. A country that emits less than its quota (e.g., Russia) could sell
its unused allotment to another country (e.g., the U.S.), which could
then emit that much more than its assigned quota. The overall emissions
reduction targets would be increased over time.

Although “emissions trading,” strictly defined, would take
place only between industrial nations, its North-South variant, the Clean
Development Mechanism (CDM) permits industrial nations to buy inexpensive
reductions in developing countries. A typical CDM plan might involve selling
China technology to make its coal cleaner. Or a U.S. coal-burning utility
could pay to expand or preserve forests in Costa Rica, which would absorb
some of the excess carbon dioxide emitted in the United States. These
North-South carbon trades are being actively promoted by the World Bank—even
as the Bank continues to underwrite carbon-intensive projects in poor
countries. Between 1992 and 1998, the World Bank underwrote $13.6 billion
for coal-powered generating plants and oil and gas explorations in developing
countries, according to a study by the Institute for Policy Studies.

There are profound problems with such proxy-reduction schemes. They are
impossible to monitor. There is no agreement on enforcement mechanisms.
Moreover, they allow wealthy countries to buy their way out of real carbon
reductions at home. Finally, they are preventing the huge surge of worldwide
economic expansion that would accompany the wholesale transfer of clean
energy technologies to developing nations.

Problems with Current U.S. Policy

Key Problems

  • The U.S. is committed to a deeply flawed system of international carbon
    trading. Though most nations say trading should be used to supplement
    domestic emissions cuts, the U.S. insists on meeting all its Kyoto obligations
    through trading.
  • The U.S. has rejected a 2002 deadline for ratification of the Kyoto
    Protocol, a deadline supported by six of the G-8 nations.
  • Washington’s obstructionist role in the Kyoto negotiations threatens
    a meltdown of the international diplomatic process.

Domestically, properly designed emissions trading programs can be effective.
The U.S. program to reduce acid rain-causing sulfur dioxide emissions
has worked relatively well, because it is easy to monitor and enforce.
About 80% of U.S. sulfur dioxide emissions belched from 2,000 smokestacks
in the Midwest, which was a manageable number of sources to monitor. The
program, moreover, was subject to a coherent system of national regulation.
Although it has not eliminated all sulfur emissions from Midwestern power
plants, it has reduced the amount of acid rain in Northeastern states.

By contrast, international carbon trading—either between industrialized
countries or between industrial and developing nations—cannot work.
Carbon is emitted from millions of sources all over the world—far
too many to monitor. And there is no binding international regulatory
system to enforce emissions limits. On the contrary, industrial nations
are permitted to borrow from future allocations to avoid meeting specified
limits within designated dates. Some nations are seeking trading credits
for “emissions avoided,” resulting from more efficient energy
projects planned long ago but only now coming on line. Moreover, under
the 1990 baseline established for industrial countries, nations like Russia,
whose economy shrank dramatically after the breakup of the Soviet Union,
have large quantities of emissions rights to sell—even though it
is emitting far less today than it did in 1990. And under another loophole
in the current rules, coal-rich Australia is actually entitled to increase
emissions by 8% over 1990 levels.

The “cap-and-trade” mechanism in the Kyoto Protocol is also
fraught with profound equity problems. The industrial nations want allocations
based on 1990 emission levels to ensure continuity of their economies.
Developing countries contend that only a per capita allocation is fair.
But if the emissions quota for each U.S. citizen were the same as each
citizen of India, the U.S. economy would dramatically shrink.

Under the North-South Clean Development Mechanism, moreover, the Kyoto
Protocol allows industrial nations to buy limitless amounts of cheap emissions
reductions in poor countries and to bank them indefinitely into the future.
This means that when developing nations eventually become obligated to
cut their own emissions, they will be left with only the most expensive
options—an outcome critics decry as a form of environmental colonialism.

Finally, even if all problems of monitoring and enforcement were solved
and the equity problems addressed, the “cap-and-trade” mechanism
would still be inadequate to achieve the 70% reduction scientists say
is required to pacify the inflamed atmosphere. At most, international
carbon trading should be used as a fine-tuning instrument to help nations
attain the last 10 to 15% of the 70% emissions reductions required to
allow the climate to restabilize.

A number of governments—frustrated by U.S. obstructionism—are
now moving ahead unilaterally. France is proposing a tax on fossil fuels.
The Dutch are formulating a plan to reduce emissions by 80% over the next
50 years. Britain announced it will triple its Kyoto obligation (cutting
its emissions by 21% below 1990 levels by 2012) and is committing to overall
cuts of 60% within 50 years.

But a patchwork of national initiatives is not a good option. The Kyoto
Protocol represents a profoundly important international effort. To allow
the protocol to die a slow death, while countries take matters into their
own hands, is counterproductive in the long term. What is needed is sustained
international collaboration under a system that is effective, equitable,
and enforceable.

Domestically, the U.S. is also undermining the intent behind emissions
trading by continuing to subsidize coal, oil, and natural gas at the rate
of about $20 billion a year. With rising prices at the pump, U.S. officials
are considering suspending gasoline taxes even as Europe reduces subsidies
on fossil fuels.

Finally, the 1997 U.S. Senate resolution not to exempt developing countries
from the first round of emissions cuts (as specified in the Kyoto Protocol
and agreed to by former President George Bush) jeopardizes many corporations.
If the U.S. does impose energy cuts on poor countries without providing
equivalent sources of clean energy, developing countries’ purchasing
power will shrink, triggering large job losses at Boeing, Gillette, Coca
Cola, Procter & Gamble, and other companies that have saturated the
domestic market and are seeking future earnings through exports to developing
nations.

Toward a New Foreign Policy

Key Recommendations

  • The developed nations should withdraw subsidies from oil and coal
    industries and create equivalent subsidies for renewable technologies
    to create incentives for the major oil companies to decarbonize their
    energy supplies.
  • The U.S. should push for the adoption in the Kyoto Protocol of a progressive
    fossil fuel efficiency standard as the central mechanism for emissions
    reduction. This mechanism is easy to monitor, would eliminate equity
    issues, and could be complemented by a modest emissions trading system.
  • The nations of the world should create a fund (on the order of $300
    billion a year) to finance the transfer of clean energy to developing
    countries by use of a Tobin tax.

First, industrial countries should switch national subsidies away from
fossil fuels and toward renewable energy technologies. (A small portion
of those subsidies should be retained for low-income fuel assistance as
well as for job retraining of displaced coal miners.) The U.S. government
spends about $20 billion a year subsidizing the fossil fuels industry.
Globally, the annual subsidy for carbon fuels has been estimated at $300
billion. The removal of those subsidies and the creation of equivalent
support for renewable technologies would provide significant incentives
for the major energy companies to aggressively develop fuel cells, solar
and photovoltaic energy, and wind power. As renewable energies become
economically competitive, these subsidies should be phased out.

Secondly, in place of the current emissions trading regime, parties to
the Kyoto Protocol should adopt a progressively more stringent fossil
fuel efficiency standard (FFES). If every nation began at its current
baseline to increase its efficiency by specified amounts at designated
intervals, that would sidestep the equity controversies embedded in international
emissions trading. Such a standard would be far easier to negotiate and
monitor than the current “cap-and-trade” system. Fossil fuel
efficiency monitoring would simply involve calculating changes in the
ratio comparing a nation’s annual carbon energy use to its gross
domestic product.

Adoption of a progressive fossil fuel efficiency standard would require
countries to derive progressively larger proportions of their energy from
noncarbon or low-carbon energy sources. That, in turn, would stimulate
the mass markets to slash the costs of solar, wind, hydrogen, and other
noncarbon technologies and make them economically competitive with coal
and oil. (Under a fossil fuel efficiency standard, all renewable, noncarbon
technologies are considered 100% efficient.)

Were a progressive FFES to be adopted by the parties to the Kyoto talks,
industrial nations could continue to supplement their progress by financing
emissions reductions in developing nations. Unlike emissions trading,
such “trades” would be a secondary instrument to complement
much more sweeping energy changes worldwide.

Virtually all developing nations would be happy to switch to solar, wind,
and hydrogen energy. Virtually none can afford it. Without significant
financing for the technology transfer, education, and capacity building,
this transition will not happen. The creation of an energy modernization
fund is essential.

The most attractive revenue source to fund global energy conversion seems
to be a tax on international currency transactions. Such a tax was first
conceived by economist James Tobin, a Nobel laureate, as a way to stabilize
capital flows. (See FPIF vol. 3, no. 5, April 1998.) In addition to this
benefit, it appears to have the broadest based, least discriminatory,
and least regressive impact of all the options for funding the energy
modernization fund.

Since the late 1970s, when Tobin first proposed taxing currency transactions,
their volume has skyrocketed. Today these transactions total about $1.5
trillion per day. A quarter-of-a-penny tax per U.S. dollar on such transactions
would easily yield the $200 to $300 billion a year developing nations
will need to purchase, produce, and deploy climate-friendly energy sources.

The result of these combined strategies would be a worldwide energy transition,
which would expand developing economies in much the same way as the Marshall
Plan revitalized the economies of Europe after World War II. The creation
of climate-friendly energy sources in developing countries would allow
them to grow without regard to atmospheric limits and without the budgetary
burden of imported oil. Moreover, with its large-scale creation of jobs,
a program to rewire the planet with clean energy would raise living standards
in the developing nations without compromising economic achievements in
the industrialized nations.

Politically, this set of strategies should be attractive to the CEOs
and heads of state who declared climate change to be the paramount challenge
to humanity at the World Economic Forum in February 2000. The forum’s
requirement that industrial countries regulate multinational oil corporations,
generate huge numbers of jobs in the renewable energy sector, and transfer
significant amounts of energy generating resources to developing nations,
should also appeal to the labor, human rights, and environmental constituencies
that surfaced in November 1999 during the protests at the World Trade
Organization meeting in Seattle.

Finally, there is a strong economic motivation to adopt policies like
those discussed here. A worldwide transition to climate-friendly energy
sources would generate a substantial increase in the total wealth and
stability of the global economy. On the other hand, the costs of business-as-usual
will be morally irresponsible, environmentally suicidal, and economically
prohibitive. Without a rapid worldwide transition to clean energy, the
continuing succession of floods, storms, droughts, epidemics, property
losses, and incursions of environmental refugees will tear holes in the
global economic fabric.

Ross Gelbspan, a former journalist with the Boston Globe, Philadelphia Bulletin, and Washington Post, is author of The Heat Is On (Perseus Books, 1998). He also maintains the website: http://www.heatisonline.org/.